Institutional investors step into Priceline

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

The latest in a series of never-ending twists in the Eurozone saga sacked shares Wednesday, hoisting both the ire of participants and Italian yields to new heights in the process. Volume was below par, indicative of a market that expects the problems in Italy to be resolved — to its short-term satisfaction, at least.

If one were to take a step back, wipe the fundamental backdrop clean with an imaginary wand, and look at shares purely from the standpoint of supply/demand, shares behave normally. Technically, the big picture is that of a market going through a normal digestive process in the wake of an October that by one measure was the most productive in nearly two decades.

As mentioned in Tuesday's report, it would be normal and healthy for the averages to retrace one-half or more of their rise off the Oct. 4 intraday lows. This would mean a 3.6% drop from Wednesday's Nasdaq Composite
COMP, +0.65%
close. In fact, retracements of one-third to two-thirds of a prior advance are considered normal. For a two-third retracement of its Oct. 4-27 vault of 19.8%, the Nasdaq would need to pull back roughly 6.5% from Wednesday's close.

The point here is that as frustrating as it might be to some players to watch the averages become beholden to a crisis thousands of miles from home, sans crisis, it is largely business as normal on the surface of things (in the averages).

This says nothing about potential leadership, and the extent to which it is being impacted by the backdrop. This is unknowable. What is knowable is that the market has not yet exhibited the dynamic breakout action in the segment that most often contributes mightily to its leadership: the aggressive growth set.

Rather than speculate as to whether a new bull began with Oct. 4's intraday lows or whether this is just a contra-trend rally in an ongoing bear market that began six months ago, or whether this is part of a bear super-cycle that began in March 2000, it is preferable to have no opinion at all. This facilitates the flexibility and open-minded approach that is believed to be vital in successful intermediate-term speculation.

Among the names, Priceline.com
PCLN
is a rare bird in this day and age. It is an institutional must-own, so named because large investors who follow a growth-stock mandate only have so many issues to choose from with 30%+ earnings growth and large-capitalization status. Most companies growing this fast are found in the small- and mid-capitalization spheres. By contrast, PCLN has a $26 billion market capitalization and an average daily dollar volume of $762 million.

PCLN earnings are expected by most analysts to grow 68%/30% in '11/'12. This follows growth of 56%/78%/87% over the most recent three quarters, respectively. Revenue growth was 38%/44%/45% over this same period. Earnings stability is high (standard deviation of 9%), particularly for a company showing such rapid growth. Mutual funds owning the stock have increased over the past four quarters.

Technically, PCLN has been going sideways for six months as it digests the excesses of its 1,100%+ run-up since October '08. In three of the past six weeks, price has advanced on above-average volume that increased from the prior week. This fact, plus Tuesday's 8.6% rise on volume 175% above average, its third-biggest volume day in 15 months, speak of institutional sponsorship, a plus.

For the aggressive position trader, the stock is potentially buyable on a volume-backed takeout of the Sept. 20 high of 554.00. A protective sell-stop of just below the Oct. 28 high of 526.75 could be used, which would amount to 5% risk if proven wrong. To further mitigate risk in the event of a breakout that reverses, a junior position could be initiated which would reduce the risk to half the 5% level accorded to a full-sized position, or 2 1/2%. A reduced starter position could then be added to as price moves in the desired direction.

Rackspace Hosting
RAX, +1.85%
is another prime base-builder with sizable earnings estimates (49%/54% for '11/'12) that has also shown strong institutional interest as it puts the finishing touches on its multi-month base. Ideally, the stock will pull back or move sideways for at least a few days prior to attacking the top of its base and offering an attractive entry opportunity.

Skullcandy
SKUL
initially mentioned in Tuesday's report as a possible leadership candidate if the European lid comes off shares, is forming a 3 1/2 month cup-shaped base following its July IPO. The maker of headphones geared to the action-sports and active-lifestyle market posted a 22-cent-a-share loss in '10. Most analysts expect a 93-cent profit in '11 and a $1.16-cent profit in '12. This is a micro-cap issue, hence much more volatile and riskier than most issues spoken about here. Technically, the stock is building a constructive base, but is not yet believed to offer attractive entry.

In summation, institutional participation has not been particularly impressive, and for good reason: The Eurozone saga has chilled many large investors' appetite for stock. Individual stock leadership is thin. There is scant opportunity for the intermediate-term speculator who stalks aggressive growth titles.

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